Westpac Banking Corp (ASX: WBC) is one of Australia's best dividend stocks. It has huge balance sheets and since January 2000, its share price has absolutely smashed the return of the S&P/ASX 200 (ASX: XJO) (^AXJO).
Source: Google Finance
It has returned 222% whilst the index has climbed only 73%. And that's not including dividends.
If you did include them however, that number would grow to over 320%.
Any income investor would be happy with that!
But with so much uncertainty facing the country, can we expect more of the same in the coming decade?
In order to answer that question, first we have to recap on the past to see how it grew so quick.
First, a two decade long housing boom has driven demand for mortgages to record highs, aiding the share prices of both Westpac and its number one rival, Commonwealth Bank of Australia (ASX: CBA). Who between them control around 50% of all Australia's mortgages. With house price to household income ratios reaching new highs, it's unlikely to continue on the upward trend into the near future.
Second, during the GFC and numerous other credit crunches, the market was ripe for consolidation. Westpac – more so than any of its rivals – took the opportunity to consolidate the market with acquisitions of smaller banks such as St.George and mortgage brokers like RAMS. In the near future, it won't be possible for the banks to buy growth here in Australia because there is no one left to acquire.
Lastly, the mining boom played a big part in growing our economy and now that it has passed us by, our investment led economy will start to transition into one which is service led.
In the near future, unless Westpac can grow overseas then its earnings and margins will continue to come under pressure. We've already seen the banks cannibalising their own margins by offering discounted rates to their peers and Westpac is no exception. In the first half of this year the bank's Net Interest Margin (NIM) fell slightly which could perhaps be a sign of things to come.
What about the dividend?
I'm tipping only modest growth from the banks in the long term, averaging no more than 6%-10% because, perhaps with the exception of Australia and New Zealand Banking Group (ASX: ANZ), none have promising long-term growth strategies which will enable them to beat the market.
If you factor in Westpac's high share price, the risks of losing an opportunity to invest in something growing at a quicker rate because you hold out for its interim or annual dividend, could end up costing you more than 5.3% per annum.
If the share price was lower, investors might likely be willing to accept modest growth in return for a higher dividend yield but it's not. With no clear and significant long-term growth strategies, increased competition, smaller margins and high house prices, the chances of investors outperforming the market by buying Westpac shares today are, in my mind, very slim.
